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Propositions And Implications Of The Law

 Propositions and Implications of the Law
  1. Full Employment in the Economy

    The law is based on the proposition that there is full employment in the economy. Increase in production means more employment to the factors of production. Production continues to increase until the level of full employment in reached. Under such a situation the level of production will be optimum.

  1. Proper Utilisation of Resources

    If there is full employment in the economy, idle resources will be properly utilised which will further help to produce more and generate more income.

  1. Perfect Competition

    Say’s Law of market is based on the proposition of perfect competition in labour and product markets. Other conditions of perfect competition are given below:

    1. Size of the Market – According to Say’s Law, the size of the market is large enough to create demand for goods. Moreover, the size if the market is also influenced by the forces of demand and supply of various inputs.

    2. Automatic Adjustment Mechanism – The law is based on this proposition that there is automatic and self adjusting mechanism in different markets. Disequilibrium in any market is a temporary situation. For instance, in capital market, the equality between saving and investment is maintained by rate of interest while in the labour market the adjustment between demand and supply of labour is maintained by the wage rate.

    3. Role of Money as Neutral – The law is based on the proposition of a barter system where goods are exchanged for goods. But it is also assumed that the role of money in neutral. Money does not affect the production process.
  1. Laissez Faire Policy

    The law assumes a closed capitalist economy which follows the policy of laissez faire. The policy of laissez faire is essential for an automatic and self-adjusting process of full employment equilibrium.

  1. Saving as a Social Virtue

    All factor income is spent in buying which they help to produce. Whatever is saved is automatically invested for further production. In other words, saving is a social virtue.

    Criticism of Say’s Law

  1. Supply does not Create its Demand

    Say’s law assumes that production creates market for goods. Therefore, supply creates its own demand. But this proposition is not applicable to modern economics where demand does not increase as much as production increases. It is also not possible to consume only those goods which are produced within the economy.

  1. Self-Adjustment not Possible

    According to Say’s Law, full employment is maintained by an automatic and self adjustment mechanism in the long run. But Keynes had no patience to wait for the long period for he believed that “In the long run we are all dead.” It is not the automatic adjustment process which removes unemployment. But unemployment can be removed by increase in the rate of investment.

  1. Money is not Neutral

    Say’s Law of market is based on a barter system and ignores the role of money in the system. Say believes that money does not affect the economic activities of the market. Conversely, Keynes has given due importance to money. He regards money as a medium of exchange. Money is held for income and business motives. Individuals hold money for unforeseen contingencies while businessmen keep cash in reserve for future activities.

  1. Over Production is Possible

    Say’s Law is based on the proposition that supply creates its own demand and there cannot be general over production. But Keynes does not agree with this proposition. According to him, all income accruing to factors of production is not spent but some fraction out of it is saved which is not automatically invested. Therefore, saving and investment are always not equal and it becomes the problem of overproduction and unemployment.

  1. Underemployment Situation

    Keynes regards full employment as a special case for the reason that there is underemployment in capitalist economies. This is since the capitalist economies do not function according to Say’s Law and supply always exceeds its demand. For example millions of workers are prepared to work at the current wage rate and even below it, but they do not find work.

  1. State Intervention

    Say’s Law is based on the existence of laissez faire policy. But Keynes has highlighted the need for state intervention in the case of general overproduction and mass unemployment. Laissez faire, in fact led to the Great Depression, had the capitalist system been automatic and self adjusting. This would not have occurred. Keynes therefore advocated state intervention for adjusting supply and demand within the economy through fiscal and monetary measures.

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